Once upon a time, there was a little girl called Mary who was given a dozen cupcakes. She was very happy with them and showed them off to her fairy godmother (FG).
“What lovely cupcakes!” said FG. “If you like, I can use my magic powers and turn them into more cupcakes. But you must leave them with me for 20 years. For every year that you leave them with me, I will add more cupcakes to your stash.
Mary loved and trusted FG but the thought of giving up all her cupcakes was too much to bear. So she took two to eat and left the rest with FG.
20 years later she returned to FG and true enough, her cupcakes had multiplied to fill many cupcake stands. She was able to feed her growing family, throw a party and have some left over to trade for other nice things (like a nice Hermes bag because they were very nice cupcakes).
Everyone was happy.
The End.
Wait a minute, you must be thinking “what do you mean ‘The End’?”! Like, what did FG do to get Mary from 10 cupcakes to a whopping amount to fill many cupcake stands right?
Well, magic of course (remember she’s a fairy?). Except, we’re not really talking about cupcakes are we? We’re talking about something of value that is put away and through time and something “special”, becomes more than its original sum.
Yes, we’re talking about the magic of compound interest that happens to your money when you put it in a regular savings or investment plan.
But what is compound interest and how does it work?
The word “compound” used here just means “accumulated” and interest is well, a sum of money that is regularly paid. So “compound interest” is just “accumulated sums of money” or earning interest on interest.
And the reason why so many people are interested (heh, pardon the pun) in compound interest is because they want to take the initial sum of money they have, put it away in financial products they trust and let it grow over time – very much like how Mary entrusted her cupcakes with FG.
Let’s apply compound interest to actual money. If you have some cash to spare, say $10,000, here’s how much you can save in 10 years. Watch how compound interest works its magic, assuming a compound interest rate of 5% per annum:
So when all’s said and done, be smart in managing your money. Make use of compound interest and start saving or investing early. It’s the only way you can have your cupcake and eat it too.
If you need an FG like Mary’s, speak to your preferred financial adviser representative or contact our Aviva Relationship Consultants here.
The post Of cupcakes and compound interest! appeared first on Money Banter.